Monthly Archives: March 2010

Towards the end of 2009, remarkable appreciation in values has been observed by the residential markets across big cities of India. Report by Wakefield and Cushman informed that in the two key residential markets in India, Mumbai and NCR, this trend is most prominent. In these areas, as compared to the same period of last year, values in Oct-Dec 2009 were appreciated.

Since Mumbai and NCR are one of the high demanded markets, both from the investors and consumers, it witnessed a faster recovery than other cities. As a result of economic slowdown, these investors were backing out their requisites which had brought a kind of uncertainty in the job markets. But on the other hand, this slowdown brought affordable housing to the consumers which in turn led to sharp upward correction in the capital values and strong recovery in the economy.

Since in NCR, a large number of projects were sold out as soon as they were launched, it can be concluded that the demand for the housing which seems to be affordable, i.e., ranging from 20 to 40 lakhs was quite high. Recently, 500 flats offered by Supertech in Noida at a cost of 9.75 lakhs are sold out just after its launch. Due to the new trend, volume of transactions has been aggrandized.

However, this trend can continue only if the government takes back the extra burden of the 10.3 percent service tax which was announced in the budget 2010 on the sale of flats before there completion. This may make the projects under construction more attractive.

After the budget 2010, SBI brings a gleam of hope for home loan borrowers as it plans an extension in the home loan relief plan.

SBI, the State Bank of India, one of the largest lenders in India, has indicated that although there would be slight changes, but it may still consider continuing its much-talked-about 8 % home loan scheme. One of the top officials of SBI said that even though they bring modifications in their products, which tune with their liquidity position normally they don’t kill any product. However, the banking major have not yet formally announced the extension of the bid whose tenure gets over on March 31.

The corporations like ICICI Bank and mortgage lender Housing Development Finance Corporation which are the major competitors of SBI also copied this scheme of SBI but later withdrew them because the RBI disapproved such products and drying liquidity.

But according to the officials it is one of the best home-loan plans in the market since it assisted other sectors to grow like cement and steel. It is a very successful offer. It also tremendously contributed to the overall economic growth.

However, the ‘teaser’ schemes were not liked by the Reserve Bank since it was related with the ability of customers to pay the rates of interest when it got back to the usual level after the period of this scheme expires.

One of the exclusive and elegant residential locations in Central Mumbai is Powai. Here the realty prices are now touching the sky. In last eight months, its rates have just doubled themselves. Short while ago, a property by Ekta World and Supreme Universal– a 2 bedroom-hall-kitchen (BHK) of 985 sq ft in Lake Homes, a residential complex was rated between Rs 90 to 95 lakh while the cost of exactly same size flats a nine month back would have been 68lakhs, Even in 2007, when the realty sector was at its peak, this flat would have been priced for Rs78 lakh.

In Lake Homes, the costs have been constantly going up. Just a month ago, the cost of the property was between Rs80 to 85 lakh; even there were four deals that took place at these prices. A resident of that area himself witnessed this price hike. He also told that since the real estate segment was going through depression, the 4th phase of Lake Homes was launched in May 2009 at a rate of Rs5,400 per sq ft. But now the prices are rapidly moving upwards. In Powai, a broker also informed that now-a-days, cost of a resale property in Lake Homes ranges between Rs11,000-Rs11,500 per square feet.

The Nahar Amrit Shakti project belonging to the Nahar Group which had a rate of 52 to 58 lakhs for new building in Powai is now asking for a price of around 90 lakhs. The project named Lilium & Lantana which was launched during the depression period and quoted at Rs5,400 per sq ft has now jumped to Rs9,000 per sq ft.

With all this, a service tax of 3 percent is also payable by consumers if the property is under construction. Although the Budget acts on service tax on such properties have not yet imposed, but builders are obviously passing on this proposed tax to buyers. Even the interest rates of home loans are to increase soon.

Although most of the ample to mid-sized fresh offerings have received a cold response, the news is that quite a few real estate companies are bent on going ahead with their initial pubic offering (IPO) plans. Rumor in the market is that apartments at discounted rates in the projects of these companies in return for subscribing to the issues seem quite attractive to a few fund managers.

Due to the big margins in the business and the fact that these projects are not yet completed, this kind of plan will not be very expensive for the real estate firms. In comparison with the hundreds of crores that are on stake, these few crores seem like nothing to these Realtors. Market analysts claimed that at least two companies which came out with IPOs recently had such a plan with some fund managers.

As expected, despite expensive valuations, both the offerings witnessed a huge response from institutional investors. Since along with the stock market backing the property developers, the banks are also reducing their funds in the real estate sector, it has become an acute situation for many money-starved builders.

Oracle India, which was in discussion with Brigade, a Bangalore-based Group, for a 1.2-million square feet trade space in its Brigade Gateway
project, has lost the deal. The office space in Brigade Northstar,a tower complex with 30 floors within Brigade Gateway,to amalgamate its several leased spaces in Bangalore was the next plan of the IT major, Oracle.

But, through an email, it informed its employees that Oracle has decided not to badger this location any further since the deal is off. Around 8000 employees were likely to be transfered to the Northstar facility but the deal crashed.

Northstar is a part of Brigade Group’s 40-acre township called Brigade Gateway and includes apartments, Sheraton Hotel, malls and Columbia Asia Hospital.

It could have been one of the major deals if it would have been made. Brigade could make a profit of Rs. 600 cr. from this deal. Oracle was following Brigade since last six months but the deal could not get through since the differences over in the prices could not be waved off.

In around 12 months from November 2009, the first team will be shifted to the new location was the upcoming plan of Oracle. Centralising its common operations and administrative functions was another hope.

tThe real estate sector got hit quite seriously by the budget details. Very intelligently the Budget bribed the home buyers in the form of interest rate subvention and tax savings. On the other hand service tax on lease rentals in the Finance Bill was also brought back. So, the builders decided to pass on the service tax burden to customers. The continuation of interest rate subvention and higher disposable income in favour of individuals through income tax reliefs would make up for it and appear as the silver lining.

A maximum tax savings announced by Budget of Rs 20,000 for those earning an annual income up to Rs 5 lac and up to Rs 50,000 for those earning up to Rs 8 lac is likely to find its way towards buying homes. But the biggest worry of developers is re-introduction of service taxes.

Jai Mavani, executive director and head of the real estate practice at KPMG said, “The imposition of service tax will increase the price of properties.This has hit the hardest, as even renting under-construction property will attract service tax now.” Apart from this though the budget gave some relief by extending the completion deadline to projects started before March 31, 2008 as “one-time relief to the sector” but still developers and consultants said the measure does not help much. the impact of the amendment would be marginal because the commencement date of March 31, 2008, has not been extended but the period for implementation has been extended by one year.

However, hotel industry welcomes expansion of investment-linked deduction. The finance minister’s gave investment-linked deduction to new hotels in two-star or above categories.States like Himachal Pradesh and Uttarakhand will be benefitted. Now it has been extended to all.

A Delhi-based analyst said, “It’s a good measure that will boost investment in the tourism sector, with high employment potential. Also, the fact that the benefit is made available to hotels across the board will boost investment in all categories”.

The fact that inflation rate and overall prices of raw material are rising is becoming one of the major reasons for the property price rise.

In the last few months, developers have boosted up the property prices by 10 to 35% while offering exciting packages as a gadget to attract buyers.

The joint managing director ofRoyal Palms,Mr. Dilawar Nensey accepted that they have accreted prices from Rs 3,999 to Rs 4,930 per sq ft but on the contrary, also claim that it is still 25 to 30% cheaper than the other available properties of Goregaon and Mumbai.

According to experts, there were 300,000 affordable homes announced by the developers across India 15 to 18 months ago to tide over the burden in the property market and mop up resources to pay back debt.

CEO of Liases Foras, a property research form that tracks projects and prices, Mr. Pankaj Kapoor reported that in order to show high sales, an aid of launching affordable housing was used. So far, no delivery is started. Most of the projects have not yet been started even.

Although many examples of such projects remain stalled due to lack of approvals, it seems thatTata Housing’s project at Boisar, 120 km away from Mumbai will be handed over to buyers later this year.

Nensey claims that ideally, an affordable house should be a basic one but be priced about 20%to 40% less than the prevailing rates. However, with the tag of ‘affordable’, developers are selling their projects in far-flung areas at the prevailing prices.

Another problem is location. Dearth of infrastructure and hikes in transportation costs makes the cheap home unavailable, if the drive to work is 100 kms.

Kapoor concluded with his words “Only a superman can afford to stay in an affordable home… and zip to office through the air!

Since most builders have hiked prices, along with the recent budgetary proposals, it is likely that realty sector may lack in demand in the long term.

Under the Union Budget 2010 announced by Mr. Pranab Mukherjee, the realty sector has not been able to get much. Although some acts were made, a lot remained unvoiced. Schemes like extension of one-year for completion of housing projects to allege tax benefit or acceding a greater proportion of commercial space in city projects or an extension of one year for interest rate subvention may sound as a boom to few but would actually hit both developers and buyers at large through the imposition of service tax on under-construction housing projects.

IMPACT OF BUDGET ON SECTOR FINANCIALS

Decline in profit marginThe December quarter saw a growth of 27% in net sales for the industry driven by the launch of affordable housing projects by leading builders including Unitech, DLF, HDIL, Orbit, Sobha and Puravankara among others. Nonetheless, there is a downfall in profit margins due to this increase in sale. The offer of mid-income housing is not 50-60 % margins available in the premium and luxury segment resulting in industries working on operating margin of about 35-40 % while net profit is down to around 20-25 % from 50% in the December 2008 quarter. Margins were further hit for the above developers as these companies reported an increase in the cost of construction. Also, due to the service tax, apartment cost would go high resulting in discouraging the buyers.

GLEAM OF HOPE

Looking for futureAn increase in sales of residential units is expected as per the analysis made from the registration and mortgage data. A strong 30% growth in loan disbursal in the December 2009 quarter over last year has been reported by some large housing finance companies, such as HDFC, LIC Housing, SBI. Since most builders are increasing prices rapidly, along with the budgetary schemes, it is expected that the sector may see some decline in demand takeoff. However, companies that maintain a strategy of competitive pricing may be able to carry on their growth.

The decision to buy a house seems like a no-brainer. After all, it is a highly in demand tangible treasure that sees constant appreciation most of the times, besides of course, fulfilling the most basic need of mankind — shelter.

If you are planning to buy a house, then it is good to grab it now since the realty prices seem to touch sky from July since Banks have decided to increase interest rates in the range of 0.25-0.5 % points on home loans, which could further be hiked in the awaited credit policy. Moreover, the service tax of 3.3%, announced in the Budget, will be effective on your home from July.The realty developers also plan to pass the burden of service tax imposed on them, onto the end customers. Along with these taxes, someone buying a house property in Delhi will have to pay a stamp duty of 8 percent as a sale of immovable property.

Realty developers are not pleaded at many budget details.Companies including realty majors like DLF, under the patronage of Delhi-based real estate body National Real Estate Development Council (Naredco), Omaxe’s group will soon approach the FM for a rollback of service tax. However, finance ministry executives have said they won’t entertain any appeal for change in the Budget proposal. Even Mr.Y.G. Parandhe from Central Board of Excise and Customs made this crystal clear through his statement , “We are not taking up the issue as it stands now”.

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